In re Graham
| Citation | 94 BR 386 |
| Decision Date | 23 December 1988 |
| Docket Number | Adv. No. 88-0630F.,Bankruptcy No. 87-03092F |
| Parties | In re Thomas A. GRAHAM and Elizabeth M. Graham, Debtors. Thomas A. GRAHAM and Elizabeth M. Graham, Plaintiffs, v. INTERNAL REVENUE SERVICE, Defendant. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Spencer Ervin, Jr., Leslie Beth Baskin, Gratz, Tate, Spiegel, Ervin & Ruthrauff, Philadelphia, Pa., for debtors/plaintiffs, Thomas A. Graham and Elizabeth M. Graham.
Stuart Glick, Dept. of Justice, Washington, D.C., H. Stephen Kesselman, Dist. Counsel, I.R.S., Philadelphia, Pa., for defendant I.R.S.
James J. O'Connell, Philadelphia, Pa., U.S. Trustee.
The dispute before me arises in the context of an adversary proceeding brought by the debtors against the Internal Revenue Service ("IRS"), which seeks a determination that a debt owed to IRS is dischargeable. The defendant has filed two motions: one requesting "Partial Summary Judgment," and another seeking a protective order denying the debtors discovery (or, in the alternative, staying discovery pending the resolution of the summary judgment motion).1
On June 23, 1987, the debtors filed for chapter 11 relief under the Bankruptcy Code. As of the date of their filing, IRS claimed that the debtors owed certain sums of money on federal income taxes for the years 1969 through 1975. The sums claimed by IRS for years 1969 through 1972, inclusive, include assessments for fraud penalties and interest.
In February, 1980, IRS issued and mailed to the debtors, pursuant to 26 U.S.C. § 6212, a notice of tax deficiency covering the years 1969 through 1972. The purpose of this notice was to inform the debtors that IRS had determined they were delinquent in their federal income tax, having allegedly received unreported income from a corporation in which the debtor/husband was president, chairman of the board and principal shareholder.2 The debtors challenged the notice in tax court pursuant to 26 U.S.C. § 6213(a) on the basis that IRS had determined the tax deficiency and attendant penalties by using certain secret grand jury materials from a non-related matter. The debtors argued that such use constituted misuse and abuse of the grand jury proceedings, requiring invalidation of the deficiency notice. IRS denied that such use was improper, or that the resulting notices were thereby invalidated.
Debtors declined the opportunity for a trial in tax court, and instead submitted to that court a stipulated record, which provided in pertinent part as follows:
Petitioners Thomas A. Graham and Elizabeth Graham agree that if it is finally determined that the notice of deficiency issued to them for the years in issue is not invalid the deficiencies in income tax and additions to tax determined therein, although not admitted, are uncontested so that decision may be entered in accordance with respondent\'s determinations contained in the statutory notice of deficiency . . . without the necessity for the introduction of any evidence by petitioners or respondent.
Graham v. Commissioner, 82 T.C. 299, 305 (1984), aff'd, 770 F.2d 381 (3d Cir.1985). The tax court held that the notice was not invalid, and entered judgment against the debtors and in favor of the IRS in the amount of $285,529.00.3 This figure includes an additional assessment pursuant to 26 U.S.C. 6653(b), which empowers IRS to make such additions if the tax underpayment is fraudulent.4
Additionally, on March 12, 1986, the tax court entered a decision against the debtors with respect to the taxable years 1973 through 1975, and decided and ordered that there were the following deficiencies to the debtors' federal income taxes:
Year Deficiency
1973 $14,868.00
1974 3,652.00
1975 5,627.00
However, IRS apparently concedes that the tax debt due from 1973 through 1975 could be dischargeable (Reply of IRS to debtors' response to its Motion for Partial Summary Judgment, pp. 3-4; N.T. at 5), and with respect to this tax deficiency argues only that the amount cannot be relitigated in this court under 11 U.S.C. § 505(a)(2)(A). The debtors concede that, with respect to the 1973 through 1975 tax deficiencies, the debtor/wife is barred from relitigating the deficiency assessments on the basis of res judicata. (Debtors' Response to the Motion for Partial Summary Judgment, p. 8.) With respect to the tax debt for the years 1969 through 1972, IRS argues the debt is nondischargeable for two reasons: that it too cannot be relitigated under 11 U.S.C. § 505(a)(2)(A) and the doctrine of res judicata, and that it is nondischargeable pursuant to § 523(a)(1)(C).
IRS' motion for summary judgment5 was filed pursuant to Bankruptcy Rule 7056, incorporating Rule 56 of the Federal Rules of Civil Procedure. F.R.Civ.P. 56(c) allows me to grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Courts are to resolve any doubts as to the existence of genuine issues of fact against the moving party, Hollinger v. Wagner Mining Equip. Co., 667 F.2d 402, 405 (3d Cir.1981); Ness v. Marshall, 660 F.2d 517, 519 (3d Cir. 1981); In re Behr, 42 B.R. 922, 925 (Bankr. E.D. Pa.1984), the evidence being viewed in the light most favorable to the party opposing the motion. Goodman v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir.1976), cert. denied, 429 U.S. 1038, 97 S.Ct. 732, 50 L.Ed.2d 748 (1977); In re Behr.
The burden of showing the absence of a genuine issue of material fact as to any issue is placed squarely upon the moving party. Howze v. Jones & Laughlin Steel Corp., 750 F.2d 1208 (3d Cir.1984); Fairbanks, Morse & Co. v. Consolidated Fisheries Co., 190 F.2d 817, 824 (3d Cir.1951). Thus, with the above principles in mind, I must determine whether IRS has met its burden in showing that there exists no genuine issue as to all material facts which would entitle it to judgment as a matter of law.
IRS argues that I am collaterally estopped to hold that the tax liabilities for years 1969 through 1972 are nondischargeable under 11 U.S.C. § 523(a)(1)(C) by virtue of the tax court's prepetition ruling. Pursuant to § 523(a)(1)(C):
Collateral estoppel, or issue preclusion,6 embodies the principle that later courts should honor the first decision of a matter that had been actually litigated. Rider v. Pennsylvania, 850 F.2d 982, 989 (3d Cir. 1988). In order for a debtor to be precluded from relitigating issues related to dischargeability, a four part test has been established. As the Third Circuit has stated, this test requires that:
. . . (1) the issue sought to be precluded must be the same as that involved in the prior action; (2) that issue must have been actually litigated; (3) it must have been determined by valid and final judgment; and (4) the determination must have been essential to the prior judgment.
Matter of Ross, 602 F.2d 604, 608-09 (3d Cir.1979). Accord, e.g., In re Gaebler, 88 B.R. 62 (E.D.Pa.1988); In re Cobley, 89 B.R. 446 (Bankr.E.D.Pa.1988); In re McCall, 76 B.R. 490 (Bankr.E.D.Pa.1987). In determining whether this test has been met, the bankruptcy court must carefully review the record made in the court issuing the prior judgment. Matter of Ross, 602 F.2d at 608; In re Cobley, 89 B.R. at 448.
At the outset I note that the tax court decided the question of the debtors' tax liability on the basis of a stipulated record. The issue placed by stipulation before the tax court was the validity of the notice of deficiency. The tax court framed the issue thusly:
Petitioners allege that the Internal Revenue Service\'s use of these grand jury materials constituted misuse and abuse of those proceedings, requiring invalidation of the statutory notices of deficiency. Respondent, while admitting his use of the grand jury materials, denies that such use was improper or that the statutory notices are invalid.
Specifically at issue was the propriety of an order entered November 20, 1973 by then District Court Judge A. Leon Higginbotham, Jr., granting the U.S. Attorney's ex parte petition, pursuant to Federal Rule of Criminal Procedure 6(e), for authorization to disclose secret grand jury matters to IRS agents.7 The order provided, in part, that "the IRS agents, special agents, and employees shall not be prohibited from utilizing such material in the course of their official duties, for either criminal or civil purposes. . . ." Graham v. Commissioner, 82 T.C. at 303.
Rule 6(e) was subsequently amended, and the United States Supreme Court issued two decisions addressing the scope of Rule 6(e)(2) and (3), as then in force.8 In United States v. Sells Engineering, Inc., 463 U.S. 418, 103 S.Ct. 3133, 77 L.Ed.2d 743 (1983), addressing these subsequently-enacted exceptions to the rule of grand jury secrecy, the Court severely limited IRS access to grand jury materials for civil tax purposes by holding that such disclosure could only be made under court order under Rule 6(e)(3)(C)(i) upon a showing of "particularized need." In United States v. Baggot, 463 U.S. 476, 103 S.Ct. 3164, 77 L.Ed.2d 785 (1983) the court further held that a civil tax audit is not "preliminarily to or in connection with a judicial proceeding" within the meaning of (C)(i). Thus, in 1983, a civil tax audit was no longer a permissible ground for...
To continue reading
Request your trial